Statutory Accounting Principles Working Group



Statutory Accounting Principles (E) Working GroupMaintenance Agenda Submission FormForm AIssue: Reporting of Installment Fees and ExpensesCheck (applicable entity):P/CLifeHealthModification of existing SSAP FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX New Issue or SSAP FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX Interpretation FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX Description of Issue: NAIC staff has recently received questions regarding whether certain fees shall be reported as policy premium. SSAP No. 53—Property Casualty Contracts—Premiums, paragraph 6, provides specific guidance that allows for installment fees that meet specified criteria to be excluded from premium and reported as other income. An installment fee is the amount the policyholder pays if they make the choice to pay their premium on an installment basis. This fee is allowed to be excluded from premium income if it is an avoidable amount by the policyholder and the policy would not be cancelled for nonpayment of the installment fee. NAIC staff has received regulator requested clarifications regarding potential diversity in the application of the SSAP No. 53 installment fee guidance on the following issues: The first issue recommends additional language to ensure that the installment fee guidance continues to be narrowly applied, because the regulator became aware of some reporting entities seeking to analogize the application of the installment fee guidance to exclude other fees from premium income. Given the historical discussion on this paragraph, NAIC staff notes that the installment fee guidance is intended to be applied narrowly to a specific instance described in SSAP No. 53, footnote 1 and it should not be used to exclude other fees from being reported as premium. The second issue pertains to the reporting of expenses related to the installment fee (other revenue). The regulator noted that while reporting entities were reporting the installment fees in other income, there was diversity in practice for the related installment fee expenses. Most entities were reporting the installment fee expenses in underwriting expenses where there are clear reporting lines for such expenses in the underwriting exhibits. Other entities were reporting the installment fee expenses either as a contra amount to finance and service charges not included in premium or as a contra amount to “aggregate write-ins for miscellaneous income.” The amounts are being reported as “contra” to other income because there is not an explicit reporting line in the property and casualty statement of income for expenses not related to underwriting (See Authoritative Literature). This agenda item requests feedback to address potential diversity in reporting. Note that SSAP No. 35R—Guaranty Fund and Other Assessments also provides guidance regarding when a reporting entity is acting as an agent on behalf of a state or federal agency. This guidance is different than the installment fee guidance under discussion. Existing Authoritative Literature: SSAP No. 53—Property Casualty Contracts—Premiums (bolding added for emphasis)3.Except as provided for in paragraph 4, written premium is defined as the contractually determined amount charged by the reporting entity to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the insurance contract. Frequently, insurance contracts are subject to audit by the reporting entity and the amount of premium charged is subject to adjustment based on the actual exposure. Premium adjustments are discussed in paragraphs 10-13 of this statement.4.For workers' compensation contracts, which have a premium that may periodically vary based upon changes in the activities of the insured, written premiums may be recorded on an installment basis to match the billing to the policyholder. Under this type of arrangement, the premium is determined and billed according to the frequency stated in the contract, and written premium is recorded on the basis of that frequency.5.Premiums for prepaid legal expense plans shall be recognized as income on the gross basis (amount charged to the policyholder or subscriber exclusive of copayments or other charges) when due from policyholders or subscribers, but no earlier than the effective date of coverage, under the terms of the contract. Due and uncollected premiums shall follow the guidance in SSAP No. 6—Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due From Agents and Brokers (SSAP No. 6), to determine the admissibility of premiums and related receivables.6. Written premiums for all other contracts shall be recorded as of the effective date of the contract. Upon recording written premium, a liability, the unearned premium reserve, shall be established to reflect the amount of premium for the portion of the insurance coverage that has not yet expired. Flat fee service charges on installment premiums1 (fees charged to policyholders who pay premiums on an installment basis rather than in full at inception of contract) are reported in the Other Income section of the Underwriting and Investment Exhibit as Finance and Service Charges. Flat fee service charges on installment premiums, which do not meet the requirements outlined in footnote 1 (e.g., policy may be cancelled for non-payment of fee or fee is refundable), shall be recorded as written premium on the effective date of the contract and subject to the unearned premium guidelines included in paragraph 8.Footnote: 1 If the policyholder elects to pay an installment rather than the full amount or the full remaining balance, the policyholder is traditionally charged a flat fee service charge on the subsequent billing cycle(s). The amount charged is primarily intended to compensate the insurer for the additional administrative costs associated with processing more frequent billings and has no relationship to the amount of insurance coverage provided, the period of coverage, or the lost investment income associated with receiving the premium over a period of time rather than in a lump sum. As described, there is no underwriting risk associated with this service charge. If a policyholder does not pay the service charge, the policy is not cancelled (unlike non-payment of premium), but instead the policy is converted back to an annual pay plan. If a policyholder cancels coverage, the premium is returned but the service charge is not, as the service charge is not a part of premium. Clarification of finance and service charges as other income should not be construed as having any bearing on whether such charges are subject to premium taxation, which remains an issue of state law and regulation.SSAP No. 35R—Guaranty Fund and Other AssessmentsActing as an Agent for Collection and Remittance of Fees and Assessments15.In certain circumstances, a reporting entity acts as an agent for certain state or federal agencies in the collection and remittance of fees or assessments. In these circumstances, the liability for the fees and assessments rests with the policyholder rather than with the reporting entity. The reporting entity’s obligation is to collect and subsequently remit the fee or assessment.(INT 02-22) When both the following conditions are met, an assessment shall not be reported in the statement of operations of a reporting entity:a.The assessment is reflected as a separately identifiable item on the billing to the policyholder; and b.Remittance of the assessment by the reporting entity to the state or federal agency is contingent upon collection from the insured.16.The impact to the statement of operations depends on the nature of the charge:a.For charges which are the ultimate responsibility of the policyholder, follow existing guidance in paragraph 15, and pass these charges and recoveries through the balance sheet with no impact to the statement of operationsb.For charges which are the ultimate responsibility of the reporting entity and may be recovered all or in part, apply gross or net reporting in the statement of operations as appropriate based on the nature of the charge and recovery. For example, charges which are considered in rate development or for which the recovery is classified as premium should be reported gross, charges for which recovery is considered a reduction of the expense should be reported net.c.For collection or administrative fees, report such fees as revenue in the statement of operations as "Finance and Service Charges Not Included in Premiums" or "Aggregate Write-Ins for Miscellaneous Income".SSAP No. 71—Policy Acquisition Costs 2.Acquisition costs are those costs that are incurred in the acquisition of new and renewal insurance contracts and include those costs that vary with and are primarily related to the acquisition of insurance contracts (e.g., agent and broker commissions, certain underwriting and policy issue costs, and medical and inspection fees). Acquisition costs and commissions shall be expensed as incurred. Determination of when acquisition costs and commissions have been incurred shall be made in accordance with SSAP No. 5R—Liabilities, Contingencies and Impairments of Assets.Property/Casualty Annual Statement InstructionsStatement of Income Line 13 – Finance and Service Charges Not Included in PremiumsReport finances and service charges pursuant to the recognition guidance in SSAP No. 53—Property Casualty Contracts–Premiums. If a company cedes 100% of its business to an affiliate or utilizes an intercompany pooling arrangement and pools finance and service charges, include intercompany assumed and ceded amounts (i.e., report such income net of intercompany pooling). Charges should also be reported on Schedule T by jurisdiction.Schedule T EXHIBIT OF PREMIUMS WRITTEN ALLOCATED BY STATES & TERRITORIESColumn 8 – Finance and Service Charges Not Included in PremiumsReport finance and service charges on direct business pursuant to the recognition guidance in SSAP No. 53—Property Casualty Contracts-Premiums. If a company cedes 100% of its business to an pooling arrangement and pools such charges, exclude the intercompany assumed and ceded amount incorporated in Page 4, Line 13.APPENDIXPROPERTY AND CASUALTY LINES OF BUSINESSThese definitions should be applied when reporting all applicable amounts for the following schedules: Underwriting and Investment Exhibit Parts 1, 1A, 1B, 2, and 2A; Exhibit of Premiums and Losses (Statutory Page 14); and the Insurance Expense Exhibit. Policy fees, service charges or membership charges are to be included with the line of business or in Other Income, as determined by SSAP No. 53—Property Casualty Contracts – Premiums.Property and Casualty Annual Statement Blank STATEMENT OF INCOMEUNDERWRITING INCOME 1.Premiums earned (Part 1, Line 35, Column 4)DEDUCTIONS:2.Losses incurred (Part 2, Line 35, Column 7)3.Loss adjustment expenses incurred (Part 3, Line 25, Column 1)4.Other underwriting expenses incurred (Part 3, Line 25, Column 2)5.Aggregate write-ins for underwriting deductions6.Total underwriting deductions (Lines 2 through 5) income of protected underwriting gain (loss) (Line 1 minus Line 6 plus Line 7)INVESTMENT investment income earned (Exhibit of Net Investment Income, Line 17) realized capital gains (losses) less capital gains tax of $……….(Exhibit of Capital Gains (Losses)) investment gain (loss) (Lines 9 + 10)OTHER gain (loss) from agents' or premium balances charged off(amount recovered $amount charged off $...................................)............................13.Finance and service charges not included in premiums14.Aggregate write-ins for miscellaneous income15.Total other income (Lines 12 through 14) income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (Lines 8+11+15)17.Dividends to income, after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (Line 16 minus Line 17)19.Federal and foreign income taxes income (Line 18 minus Line 19) (to Line 22)Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): The footnote to SSAP No. 53, paragraph 6 was previously updated by agenda item 2001-34: SSAP No. 53 and reporting of installment fees which was adopted in June rmation or issues (included in Description of Issue) not previously contemplated by the Working Group:None.Staff Recommendation:NAIC staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive, and expose proposed revisions to SSAP No. 53 and request comments as detailed below. In addition, it is recommended that the Working Group request comments on reporting installment fee expenses as detailed below. Installment fee and services charges guidance should be applied narrowly to the specific situation described and not analogized to exclude other fees from written premium. Request comments on incurred installment fee expenses and notify the Casualty Actuarial (C) Task Force and the Property and Casualty Risk Based Capital (E) Working Group of the exposure, particularly regarding installment fee expenses. Detailed Recommendations: Issue 1 – The installment fee and services charges guidance in SSAP No. 53—Property Casualty Contracts—Premiums, paragraph 6, footnote 1, for evaluating flat fee service charges on installment premiums, should be applied narrowly to the specific situation described and not analogized to exclude other fees from written premium. Prior Working Group revisions (in agenda item 2001-34) to footnote 1 in SSAP No. 53 illustrate that the installment premium processing fee guidance is meant to be interpreted narrowly and that the payment in full or by installment is a choice by the policyholder and represents an avoidable amount. The criteria is intentionally narrow and specific to installment fees. It is incorrect to apply this guidance to other fees. Key underlying points to this response are: Reporting - All insurance reporting entities bear the cost of issuing a policy, issuing endorsements, and cancelling or reinstating policies whether that is accomplished directly or indirectly through an outside party. SSAP No. 71 provides that policy acquisition costs are expensed as incurred. Costs of issuing and servicing a policy are part of underwriting expenses therefore most “fees” are not intended to be excluded from premium. Premium tax - NAIC staff notes that classifying amounts collected from policyholders by agents / managing general agents or third-party administrators as fees, which are excluded from written or earned premium, is an issue that many jurisdictions are familiar with as an attempt to avoid paying premium taxes. In addition, SSAP No. 53, paragraph 6, footnote 1 provides that “Clarification of finance and service charges as other income should not be construed as having any bearing on whether such charges are subject to premium taxation, which remains an issue of state law and regulation.”Risk Based Capital - The classification of amounts out of premium revenue and into other income and other expense instead of underwriting expenses changes the risk-based capital charges for insurance risk. The RBC charge on insurance risk is based on the loss / loss adjustment expense ratio and the combined ratio which includes underwriting expenses. Issue 2 – Should incurred installment fee expenses be reported in other expenses?SSAP No. 53 allows for installment fee income that meets specified criteria to be excluded from premium and reported as other income with finance and service charges, however it does not separately address the related installment fee expenses incurred by the reporting entity. The annual statement instructions provide that the expenses that are most commonly associated with installment expense such as postage printing and stationery are reported in underwriting expenses. These expenses and their related revenue are typically immaterial for most property and casualty products but are material for some nonstandard product writers. Having a mismatch between underwriting revenue / underwriting expenses and other revenue / other expenses can affect a reporting entity’s combined ratio as the combined ratio considers the losses, loss adjusting expenses and underwriting expenses.From a purely conceptual basis, it might be more consistent if the installment fee expenses are reported in other expenses. This is because it is a theoretical mismatch in the annual statement to report the installment fees in other revenue and have the related expenses in underwriting expenses. While this might be better theoretical match to have both the revenue and expense in the same category, NAIC staff notes that not having “other expenses” in the property and casualty income statement seems to be an intentional choice as there are no “other expense” reporting lines. Therefore an “other expense” would have to be reported as a contra revenue. If incurred installment fee expenses were to be reported in other expenses, a reporting location would need to be determined as there is not an annual statement line to accommodate such reporting. If it was reported, it would most like have to be report as a contra amount in “Aggregate Write-Ins for Miscellaneous Income” (not in underwriting expenses) as netting it in Finance and service charges would not provide transparency. Further, if reported, limitations would need to be determined – i.e. expenses not to exceed installment fee revenue.Questions for exposure: Should the Working Group develop guidance to allow installment fee expenses associated with fees that are reported in other income according to the criteria in SSAP No. 53 be permitted reported in or as an expense in “Other Income?” If included in Other Income, should the expense be classified as a contra revenue in or “Aggregate Write-Ins for Miscellaneous Income”?Installment fees and expenses are often immaterial for property and casualty except for nonstandard writers. Comments are also requested on allowing diversity in reporting installment fee expenses (that is optional to report as other expense category of contra other revenue Aggregate Write-Ins for Miscellaneous Income”, particularly for immaterial amounts. Ultimately adoption of any such guidance would also require updates to the existing annual statement instructions.NAIC staff recommends that the Working Group expose the following revisions to the existing footnote in SSAP No. 53: 6. Written premiums for all other contracts shall be recorded as of the effective date of the contract. Upon recording written premium, a liability, the unearned premium reserve, shall be established to reflect the amount of premium for the portion of the insurance coverage that has not yet expired. Flat fee service charges on installment premiums1 (fees charged to policyholders who pay premiums on an installment basis rather than in full at inception of contract) are reported in the Other Income section of the Underwriting and Investment Exhibit as Finance and Service Charges. Flat fee service charges on installment premiums, which do not meet the requirements outlined in footnote 1 (e.g., policy may be cancelled for non-payment of fee or fee is refundable), shall be recorded as written premium on the effective date of the contract and subject to the unearned premium guidelines included in paragraph 8.1If the policyholder elects to pay an installment rather than the full amount or the full remaining balance, the policyholder is traditionally charged a flat fee service charge on the subsequent billing cycle(s). The amount charged is primarily intended to compensate the insurer for the additional administrative costs associated with processing more frequent billings and has no relationship to the amount of insurance coverage provided, the period of coverage, or the lost investment income associated with receiving the premium over a period of time rather than in a lump sum. As described, there is no underwriting risk associated with this service charge. If a policyholder does not pay the service charge, the policy is not cancelled (unlike non-payment of premium), but instead the policy is converted back to an annual pay plan. If a policyholder cancels coverage, the premium is returned but the service charge is not, as the service charge is not a part of premium. Note that this footnote on flat fee service charges on installment premium is intentionally narrow and specific and this guidance should not be applied to other fees or service charges. Clarification reporting of installment fees in of finance and service charges as other income should not be construed as having any bearing on whether such charges are subject to premium taxation, which remains an issue of state law and regulation.Staff Review Completed by:Robin Marcotte - October 2019 Status:On December 7, 2019, the Statutory Accounting Principles (E) Working Group moved this agenda item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 53—Property Casualty Contracts—Premiums, as illustrated above. Comments are also requested on the reporting of installment fee expenses, as noted above. Additionally, the Casualty Actuarial (C) Task Force and Property and Casualty Risk Based (E) Working Group will be notified of this exposure. FILENAME \* Lower \p \* MERGEFORMAT g:\frs\data\stat acctg\3. national meetings\a. national meeting materials\2019\fall\nm exposures\19-40 - reporting of installment fees and expenses.docx ................
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